The sort of crude smears once made by fascist regimes are now being made by top US government officials:

“I did not say they deliberately did it, but their China virus — let’s go over the facts here, correct me if I’m wrong — the virus was spawned in Wuhan Province, patient zero was in November. The Chinese, behind the shield of the World Health Organization for two months, hid the virus from the world, and then sent hundreds of thousands of Chinese on aircraft to Milan, New York and around the world to seed that,” Navarro claimed, without offering evidence such travel was directed by the Chinese government.

“They could have kept it in Wuhan, instead, it became a pandemic,” he continued. “So that’s why I say the Chinese did that to Americans and they are responsible now.”

I hope I’m wrong, but it’s hard to believe that the hateful lies coming out of the Trump administration won’t eventually have consequences. This may be the first time since the Middle Ages that a government blamed a plague on an unpopular minority group.

Fortunately, the reporter interviewing Navarro called him out on his lies:

But given his critiques of China, he was questioned by ABC News Chief Anchor George Stephanopoulos why, during that same period when the virus was spreading from the country, Trump was complimentary of Chinese President Xi Jinping as he continued to negotiate a trade deal.

“It was President Trump who was praising China all through the month of February, and, you know, there’s a lot of evidence that those lost weeks made a difference,” Stephanopoulos said.

And check out Navarro’s reponse:

“First of all, I think it’s great that we have a president that can get along with all world leaders,” Navarro responded. “But number two, there’s no lost weeks. … We were moving on three vectors of attack in February: vaccine development, development of therapeutics like Remdesivir, and the building up and capacity for things like N95 masks.”

LOL. Next time someone brags to me they have a PhD from Harvard I’ll point out that that institution also saw fit to give a PhD to Peter Navarro. To say he’s dumb as a rock would be unkind to the mineral kingdom.

A recent Free Exchange article caught my eye:

And in some circumstances the drop in demand induced by a supply shock may be larger than the decline in supply—a source of deflationary, rather than inflationary, pressure.

This idea is explored in a new working paper by Veronica Guerrieri of the University of Chicago, Guido Lorenzoni of Northwestern University, Ludwig Straub of Harvard University and Iván Werning of the Massachusetts Institute of Technology. If some sectors of the economy shut down entirely, affected workers will curtail their spending dramatically. Spending by other workers could make up for the shortfall—only if the goods and services that can still be produced are substitutes for those that cannot. The abrupt drop in consumers’ spending on plane tickets or hotel bookings is unlikely to be offset by more purchases of teleworking software instead, for instance. In the absence of good substitutes, say the authors, the economy experiences a “Keynesian supply shock”, where demand falls by more than supply. They provide another useful way to think about this state of the world: that consumption will be much more valuable in the future, as goods and services that cannot be had today become available once more. So it makes sense to spend less now, and more later.

I don’t have a problem with that analysis, but I wish these issues were framed differently. Under the gold standard it made sense to talk about “demand shocks” hitting the economy. Those would occur when there was a sudden drop in the global supply of gold or (much more likely) an increase in global gold demand. Thus an increased propensity to save or a reduced propensity to invest might cause lower interest rates. Because the interest rate was the opportunity cost of holding gold, this would boost gold demand and cause deflation. Robert Barsky and Larry Summers wrote a paper explaining this phenomenon.

But we no longer have a gold standard, and hence there’s no reason for “demand shocks” to impact nominal spending and/or prices. Instead, we have a fiat money regime, where the level of nominal aggregates is determined by monetary policy. When nominal spending rises or falls in an inappropriate fashion we have a “monetary shock” and we should call it a monetary shock. Using the term “demand shock” makes it seem like the economy was hit by some sort of exogenous shock, not bad monetary policy.

The Fed’s job is to keep inflation at 2%. If it doesn’t do so it’s not because the economy was hit by a “demand shock”, it’s because the Fed didn’t do its job. The money supply and interest rates should be endogenous, set at a let where prices are expected to rise at 2%/year.

If the bus goes over the edge into a deep canyon, it’s not because the bus was hit by a “road shock”, it’s because the bus driver didn’t do his job. But it would also be useful to install guardrails in order to make that sort of error less common.

PS. I love this article by Peter Ireland. Nice to see there are still people who understand monetarist principles.

PPS. David Beckworth updated his NGDP gap model:

Before beginning, note that David Siegel recently interviewed me:

https://www.youtube.com/watch?v=munQedJ7rSY

The following list is far from complete, but suggestive:

Countries with over 100 total reported cases, and none active:

Mauritius, Faeroe Islands

Countries with over 100 total reported cases, less than ten active:

Cambodia, Brunei, Montenegro, Trinidad

Countries with less than 100 reported active cases, falling rapidly:

Iceland, New Zealand, China, Hong Kong, Taiwan, Palestine (plus Montana, Alaska, Hawaii)

Countries with less than 200 reported active cases, falling rapidly:

Thailand, Luxembourg, Albania, Andorra

Countries with less than 1000 reported active cases, falling rapidly:

South Korea, Australia, Croatia, Lithuania, Tunisia

Countries with less than 2000 reported active cases, falling rapidly:

Switzerland, Austria, Denmark, Norway (probably, no hard data), Malaysia

Countries with less than 20,000 reported active cases, falling rapidly:

Germany, Japan, Ireland, Israel, Czechia

What can we infer from this list? Total caseloads in the US continue to rise (now over a million), although it’s starting to level off. Global totals also continue to rise. But there are many countries with fast falling caseloads, some approaching zero. And these countries are of all types: big & small, rich & poor, East & West, hot & cold, state capacity and state incompetence.

In a few weeks, almost all of these countries will have many fewer cases than they have right now. I’ll try to remember to revisit this list in mid-June. The world is dividing into two groups, the successful and the failed states. Sometimes (as in the USA) you have both types in the very same country.

PS. Of all the countries on my list, Germany has by far the biggest active caseload. But even its active caseload graph has the characteristic shape:

PPS. Countries on this list continue to see declining active caseloads even when hit by secondary waves, as in South Korea.

In response to yesterday’s post, commenter “Purple Mutt” asked:

Scott, in all the scenarios you describe here, QE has an inflationary effect versus the counterfactual of no-QE. The fact that QE is associated with exogenous deflation in one of your scenarios is irrelevant.

I’m really confused by your argument here. Are you really claiming that QE is not reliably inflationary or disinflationary versus the counterfactual, across different scenarios? If so you might need a longer blog post, I think.

Or are you arguing that engaging in QE is not really a voluntary action taken by the central bank, and as such the whole idea of the “counterfactual” is meaningless?

He or she is right; I need a longer post. Indeed I’m writing a long paper on this issue, which I hope to finish by this summer. Here’s how I responded:

This is a subtle point. Consider this analogy. Monetary policy initiative “X”causes the equilibrium interest rate to fall by 30 basis points, while the target rate falls by 18 basis points. Policy X is contractionary. Now one might argue that the 18 basis point fall in the target rate, considered in isolation, is expansionary. But people tend to look at initiative X and only see the target rate change. They wrongly believe “X” as a whole is expansionary.

Switzerland cut its target rate in January 2015, and at the same time cut the equilibrium interest rate even more (by revaluing its currency higher in the forex market). The overall effect was contractionary.

Now suppose policy initiative X increases the monetary base by $1 trillion but increases money demand by $2 trillion. The overall effect is contractionary, even though QE is expansionary (considered in isolation), as you say.

More likely, policy X does not directly increase money demand, except in the sense of “errors of omission”. It merely fails to respond to a “shock” with proper forward guidance.

Nonetheless, I worry about people getting the wrong idea when QE programs are positively correlated with economic distress. There’s a tendency to assume that “QE doesn’t work”. It’s like assuming hospitals don’t work because death rates in hospitals are high.

The counterargument is that there’s nothing wrong with mainstream economics. I hear people say, “economists understand that what matters is changes in the policy rate relative to the equilibrium rate.” Or they say, “economists understand that what matters is changes in M relative to V.”

But I can’t accept that complacent view. If there’s nothing wrong, why did perhaps 99% of economists believe the Fed was easing in 2008, while only a few lonely voices like Bob Hetzel and Tim Congdon noticed they were tightening? Why is it that even today almost all discussion of monetary policy seems to miss the point, confusing concrete steps with overall policy stances? Why do economists (with a few exceptions such as Nick Rowe and David Beckworth) fail to understand that policy is 99% signaling future intentions and 1% current concrete steps? Why do so few economists recognize that central banks can powerfully change the equilibrium interest rate through both errors of comission and errors of omission?

Macroeconomics is not about whether MV=PY is true, or whether C+I+G+NX = PY is true. It’s not about whether new Keynesian models of the natural rate are true or whether NeoFisherians are right about the long run correlation between inflation and nominal rates. These are just analytical tools. It’s a question of how the tools are used.

Similarly, central banks have also sorts of tools such as QE and negative rates on reserves. Whether these tools are effective depends entirely on how they are utilized. Because 99% of policy is forward guidance, the question of whether the other 1% “works” is close to meaningless.

Japan could create hyperinflation with enough QE. But if they really, really, actually did plan to create hyperinflation then they wouldn’t even need to use any QE. There’s already more than enough base money in Japan to create hyperinflation, if the desire to do so were sincere.

PS. Speaking of the unseen; this recent story relates to my earlier post about sniffing out phony data:

MOSCOW — Ever since the coronavirus took hold globally, researchers have been puzzled by Russia’s mortality rate of only about 13 deaths per million, far below the world average of 36 in a country with a underfunded health system.

With the arrival of data for April, however, the mystery appears to be clearing up.

Data released by Moscow’s city government on Friday shows that the number of overall registered deaths in the Russian capital in April exceeded the five-year average for the same period by more than 1,700. That total is far higher than the official Covid-19 death count of 642 — an indication of significant underreporting by the authorities.

No real surprise, as there were also undercounts in China, New York, France, and many other places.

People keep sending me videos proving this or that conspiracy theory. Sorry, but I prefer to get my information via words, not videos. (I hope that doesn’t make me a snob.) Visual images are tailor made to manipulate us. And I can read 4 times as fast as I can watch a video. What’s the point?

BTW, did you see that cool video that completely debunks flying saucers?